Complex Trust, No Income Distribution, Do we need Schedule B - Spidell

Complex Trust, No Income Distribution, Do we need Schedule B

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Message Board Complex Trust, No Income Distribution, Do we need Schedule B

  • This topic has 4 replies, 3 voices, and was last updated 2 weeks ago by Ronald Hanson.
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    • #248024
      Ronald Hanson
      Participant

      I am preparing a complex trust, Form 1041.  All income (interest, dividends and capital gains only) is required to be added to corpus (principal) and no income is paid to beneficiaries (grand-kids).  There is no Income Distribution Deduction as far as I am aware.  One of the grad-kids turned 25 in 2019 and he received his 1/4th beneficiary share of the trust assets.  The other three grad-kids will not receive their distributions until they turn 25 in several years form now.

      Since I am not taking an income distribution deduction (?), do I need to prepare Form 1041 Schedule B, to report the distribution to the beneficiary?  I would think not, but the instructions to Schedule B seem to indicate that… “was required to distribute any other amounts to beneficiaries during the year, Complete Schedule B to determine the trust’s income distribution deduction.”  Secondly, please advise if a k-1 would be required for the distribution of the beneficiaries 1/4th interest in the trust?

    • #248109
      Diane White
      Participant

      Yes, you must prepare Schedule B for the trust.  As a rule of practice I have always prepared K-1s even if there is nothing to pass-through or distribute so the beneficiary has a record for their files.

      • #248440
        Ronald Hanson
        Participant

        I am preparing Form 1041, Schedule B, Income Distribution Deduction.  One of four children beneficiaries reached the age where he received his share of the trust corpus and is subsequently removed as a beneficiary of the trust.  All income from the trust is added to corpus/principal for the current and past years… and there is no requirement to make any other distributions, other than this closing distribution to the beneficiary.

        Does the distribution to this beneficiary get reported on Line 10 of schedule B, Income Distribution Deduction?  Since I am not taking a Income Distribution Deduction, why do I need to complete Schedule B in the first place?  Is this distribution that exceeds current year taxable income and accounting income re-characterized  from a long-term capital gain (its proper treatment) and some how going to loose its favorable capital gain tax rate and be taxed as ordinary income?

    • #248553
      Gerald Weiss
      Participant

      A 1954 law change resulted in the presumption that any distribution is income first(IRC 662). As such the distribution to the child who turned 25 carries out taxable income. While a trustee does not have to take a DNI deduction under IRC 661, the result would be double taxation of the same income once at the trust level and once at the beneficiary level. Thus to avoid this harsh tax result you would want to report the distribution on Schedule B. See CCA 20100032614491121 (4/23/2010).

    • #248672
      Ronald Hanson
      Participant

      Thank you for your excellent advice!  Very clear. Very helpful. Very valuable. Most appreciative!  Ron

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